This video is a bit hard to hear at times because of the wind but it’s important to us to go to the small vertical producers out there and get their voice heard so that everyone knows what is really happening.

Rick Roberts is no “fat cat”. He and his partner Rhonda have operated wells for other people for many years. Rick works in the field. Rhonda handles the office work.They were finally able to buy a few wells of their own . Now they have lost two of those wells and are counting on losing more. Right now they just want to get to the end of the year.

Rick Roberts is an oilfield professional in Waukoma who runs the operations for several companies. As hundreds of wells are destroyed and replaced with a smaller number of horizontal wells it costs all the jobs needed to care for those wells as well as the royalty owners in them.

This shows the anatomy of losing a well; emphasizing that the operator is not a willing seller but is forced to sell for what the state says its worth Through the Corporation Commission forced pooling. This lowers values for everyone by multiple of as much as ten times. Oklahoma is the only state that allows the state to set prices. In All other states the parties negotiate for property. Isn’t that a novel concept?

If you look at the spreadsheet, a 30MCF/2bbl oil well has a valuation of $980,000. I would never pay that for a well but that is the profit that such a well is forecast to generate over the next 20 years.

After our wells get fracked into, settlement discussions often break down because we cannot come to an agreement on valuation. I think the most important point to consider is that we are not WILLING sellers of our wells and that traditional valuation models do not apply. I don’t agree to being FORCED into selling a well for a 5 year payout at today’s prices. Below are our assumptions:

In a transaction between willing parties, there has to be room for the buyer to make a healthy profit over the remaining lifecycle of the well. We are not a willing seller. Traditional valuation models with 5 or 7 year paybacks don’t apply. Many of our wells have been around for 40 years and it is reasonable to expect another 20 years of production. We compare profits from our wells to annuities.

Note: Mechanical integrity is a risk over that time period. We think it is offset by the potential for increased value due to new technology or changing environments. E.g.:

Refracking of old zones using coiled tubing.

Exponential increase in acreage value over the last 5 years

We use a discount rate of 5% which is the interest rate we pay to our bank for loans. We don’t see a reason to use PV9 or PV12.

We use oil and gas price forecasts from the US Energy Information Administration published in the “Annual Energy Outlook”. A lot more analysis goes into creating this forecast then what goes into the price deck from the local bank that is used to protect the bank’s loan values.

Most of our wells are many years old and have a fairly flat decline curve.

Our overhead and operating expenses are a fraction of the costs of bigger companies. We are able to operate profitably year after year because we keep costs to a minimum.

Our operating costs are kept low by being geographically concentrated.

We don’t have layers of management

We do a lot of the repair and maintenance work ourselves, with older equipment that we own.

We take the long view:

We don’t have to answer to boards or financial investors.

We don’t have to meet acquisition or divestiture targets.

We don’t buy wells when we think prices are too high

We don’t willingly sell wells in a low price environment. We would not willingly sell a well in the current pricing environment

My business, like so many others, cannot single handedly take on the necessary task of protecting the interests of small producers which allows us to continue to work, employ and properly develop oil and gas in Oklahoma. In the early 1980’s I joined OIPA which provided the opportunity for companies like mine to become a unified voice of representation at the Capitol and the Oklahoma Corporation Commission. I became very involved with OIPA and sat on committees, gradually chaired committees, was elected as a member of the year and was nominated and appointed to be on the Board of Directors (“BOD”) in the early 1990s; all while running my own operating company. Sadly, over the years I watched as OIPA evolved into a flashy organization that began emphasizing dollar donations over the ability, to lead and diligently produce. Today the leadership positions of the organization are simply bought not earned, resulting in a shift of interests away from the small independent producer to isolating the focus to benefit horizontal production.

The recent pursuit of the long lateral horizontal bill (the ‘bill”) blatantly benefits only a select few producers and is a direct reflection of the concurrent change in leadership within OIPA. This bill would allow all the reserves that I have worked for as a vertical producer to be stolen by horizontal drilling without my consent or proper reimbursement. The OIPA BOD rejected the bill several times for its bias toward horizontal development. The leadership directed by horizontal interests continued to push the bill without making any efforts to compromise with the vertical producers. The outlook of the bill caused a division of the organization between the horizontal and the vertical companies. The demands of current chairman to push this bill through have caused more BODs to either resign or were forced out than has ever happened in the history of OIPA. The failure to simply address the prevention of theft for those that earned reserves on vertical wellbores has not only jeopardized but reversed the very fundamental code of fair practice with which OIPA was once founded. The organization has taken a whole new attitude that horizontal interests reign supreme and there is simply little to no concern expressed for the vertical producer. In my recent letter of resignation from the Board, I stated that the organization is no longer the organization I once joined and had dedicated so much of my time and energy over the past 35 years.

The bill fails to address many of the concerns of the majority of the industry.

Well bore damage by fracking

Theft of reserves from existing vertical wells

Loss of up-hole rights in the vertical well bores

Damage of fresh water resources from breaking down old well bores from fracking

The damage to Banking lending laws by challenging the rights and ownership of reserves by the vertical drillers and their leases. This one act alone affects the majority of all small town banks found in the oil patch. Individuals who own wells need capital for emergency or their day to day lives depend on the banks to lend on those wells and their up-hole reserves. The current bill as it is written will prevent that from ever happening

The science of horizontal drilling has been a plus to our industry. The utilization of this science by companies who can identify new untapped reservoirs and drill and produce those reserves economically, without the issues listed previously makes our industry more efficient and much stronger. I cannot imagine those individuals who work for the horizontal companies justifying the theft with a clear conscience. Our industry has always used its science and talent to find new reserves for the state and the country. These actions are the reason Oklahoma wrote spacing laws to prevent the issue of one company taking assets of other companies by drilling under their leasehold.

Please do not tarnish our industry any more than it is by forcing these bills, as written, down the throats of vertical producers and thousands of families in the vertical oil patch that depend on their wells for livelihood. I know it has taken time but address and correct these issues. If that can be done then the entire industry will join you and fight with you.

Oklahoma Energy Producers Alliance regulatory affairs chairman Tom Dunlap discusses The need for data to help at the Oklahoma Corporation Commission find remedies for the destruction of their 40 vertical wells.